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 Disappointing U.S. jobs growth, manufacturing activity, and retail
sales over the winter had pushed market expectations for a rate hike
to later in the year. June has long been seen as the earliest the
Fed could tighten policy, after more than six years of near-zero
rates.
But New York Fed President William Dudley and Fed Governor Jerome
Powell on Wednesday sketched out scenarios in which the central bank
could make an initial move earlier than many now expect and then
proceed in a slow and gradual manner on further rate increases.
"I could imagine circumstances where a June rate hike could still be
in play," Dudley, a permanent voting member on the Fed's policy
committee and a close ally of Fed Chair Janet Yellen, told a Reuters
Newsmaker event in New York.
"If the economy's strong, the unemployment rate is dropping, wages
are rising, and the outlook is good, you could conceivably get to
that point," he said, adding "the bar is probably a little bit
higher" for a June hike given recent data.
 Minutes of the Fed's March 17-18 policy meeting, released on
Wednesday, also show central bank officials are eager to get the
rate hike process started but are likely to go slow once "lift-off"
begins.
Several participants at the meeting said they were virtually certain
June would be the right time for what would be the first rate hike
since 2006, according to the minutes.
While a "couple" of participants said they did not think such a move
would be appropriate until next year, the rest of the policymakers
would be watching for evidence that the impact of low oil prices and
a strong dollar had eased, and that the U.S. economy was continuing
to generate jobs.
Upcoming reports on employment, economic growth, prices, industrial
activity and other indicators will, as a result, will take on
greater importance.
U.S. stocks turned negative and prices for U.S. government debt fell
after the release of the minutes, while the dollar gained against a
basket of currencies.
MECHANICS OF RATE HIKE
Powell, speaking in New York, said he would be willing to start
tightening even at current low inflation levels, but added that the
Fed should then proceed slowly to ensure the economy continued to
recover from the 2007-2009 recession and financial crisis.
"You cannot wait until you see the goal posts coming because
monetary policy works with these long lags," Powell told the Council
on Foreign Relations, adding that the Fed could hike rates in June
if economic data over the next two months indicated the recovery is
on track.
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"By the time of the June meeting we will have had ... a lot more
incoming data on just about everything in the economy. June is a
different world than today," Powell said. "I don't think we need to
be in a hurry," he said, but "you have to start well before you
actually hit the goal." Even a modest rate hike in the world's
largest economy would ripple through financial markets.
At its policy meeting last month the Fed also refined plans for the
mechanics of the initial rate increase, which will need to be
engineered around any market turbulence that might arise.
Futures traders, who on Tuesday predicted December was the most
likely month for the tightening to begin, on Wednesday shifted that
likelihood to October, according to futures markets. Wall Street
economists generally expect the Fed to move in September.
"It’s still going to be data-dependent," said Gary Thayer, global
head of macro strategy at Wells Fargo Investment Institute in St.
Louis. "If you are looking at the factors they are focused on – the
improving labor markets, the stabilization of energy prices and the
leveling off of the dollar – those would suggest we could still see
a rate hike in summer."
While the lift-off will breach a post-crisis psychological barrier,
policymakers have repeatedly noted that rates will remain near
historic lows, potentially for years.
Dudley, among the most dovish of policymakers, said there were still
good reasons for the Fed to err on the side of hiking rates too
late, in order to make sure as many workers as possible are pulled
into the labor force. Powell also said the Fed should "look for a
little more proof than usual" that labor markets are tight.
(Additional reporting by Howard Schneider and Michael Flaherty in
Washington and Sam Forgione in New York; Editing by Chizu Nomiyama
and Paul Simao)
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